A first-rate speech / Governor stresses badly needed tax fix

As we wrote yesterday in this space, there are good reasons to worry if Gov. Arnold Schwarzenegger has the energy or interest to mount an aggressive push for change in his final year in office. If he does, however, the reform agenda he offered in his State of the State speech was outstanding.

The governor offered some practical measures to encourage job growth, starting with a proposal to speed up the permitting process for construction projects that have already won necessary environmental OKs.

He put a hugely needed spotlight on a problem – the state’s grossly underfunded pension system – that will destroy future state budgets unless far less expensive benefits are provided to new hires.

He called on Congress and President Barack Obama to shelve an ineptly crafted scheme to overhaul the U.S. health care system because it would force California to spend billions more on health programs.

But most importantly of all, Schwarzenegger urged the Legislature to take a hard, honest look at the very smart tax reform plan released in September by a commission chaired by Rancho Santa Fe businessman Gerald Parsky.

The proposal would reduce state income taxes for everyone by cutting the number of tax brackets from six to two. The new tax rate would be 2.75 percent for taxable income up to $56,000 for joint filers ($28,000 for single) and 6.5 percent for taxable income above that amount. And it would eliminate corporate income taxes and the 5 percent state sales tax.

To replace in revenue-neutral fashion the taxes that would be lost because of these changes, the state would adopt a “business net receipts tax” – a levy of up to 4 percent on the difference in value between products or services that a business buys and the cost of its goods or services when they are sold. This levy could be deducted from federal income taxes on businesses, unlike sales taxes.

Critics on the left quickly ripped the plan last fall on class-warfare grounds because it reduced the most direct tax – on income – paid by the wealthy. Critics on the right reflexively trashed it because the “business net receipts tax” would apply to a wide range of products and services not now taxed.

But those who took a thorough look at the proposal – starting with the unlikely trio of California’s moderate Democratic Sen. Dianne Feinstein, The Wall Street Journal’s conservative editorial page and former Assembly Speaker Willie Brown, a liberal – are excited by its potential. If adopted, the tax overhaul would limit the revenue volatility that has created destructive boom-and-bust budget cycles because of the state’s heavy dependence on income and capital gains taxes. And it would create a tax code more explicitly designed to promote economic growth – and big gains in state revenue – than any we’ve ever come upon.

All by itself, the elimination of the corporate income tax would do more to attract investors and obliterate the state’s image as hostile to business then all the laws enacted over the past 20 years. This and many other smart elements led the Journal to rave about the plan’s “economic incentives, simplicity, revenue stability and fairness.”

California faces budget nightmares for years to come. But these nightmares can be eased if state leaders are smart enough to overhaul the tax code in a way that promotes economic growth and creates revenue and jobs. We salute the governor for stressing that Sacramento already has a plan in hand that would do just that.